TransUnion has data about you that insurers crave

Home insurers have a new tool that can tell a lot more about those who apply for coverage against fire, theft and damage like malicious mischief.

TransUnion (TRU), one of the nation's three largest credit reporting agencies, says it can help insurers learn a lot about who lives in a home, if they have criminal violations, a driving record that includes infractions like speeding or simply didn't show up for court.

Why is this important? As the auto and home insurance market becomes more competitive, insurers aren't just interested in whether you've filed a past claim. They also want to know what you're likely to do in the future. This isn't crystal ball gazing. The accuracy of these predictions can determine whether insurance carriers will make or lose money when they sell you a policy.

And they'll use whatever information they can gather about you -- credit and job history, your neighborhood and education -- to determine if you're a good or bad risk. Factors such as race and religion cannot be used, but others, such as sex and age, are almost always included in deciding premiums for auto coverage.

TransUnion says running into trouble with the law is a very important factor. "The presence of traffic and criminal violations on household members is predictive of higher losses in homeowner insurance," said Mark McElroy, executive vice president of TransUnion's business insurance unit.

TransUnion won't peek in windows or knock on doors to find this out. Instead, it harnesses the enormous power of its data.

With $1.5 billion in yearly revenue, TransUnion has records -- and not just credit records -- on more than 500 million people in at least 30 countries. It provides that data to 45,000 businesses, according to its website. The agency's latest research takes predictive analytics to a whole new level.

An applicant for home insurance usually has to list the number of people living in the home, including minor children. But is he or she telling the truth? Or are other people also living in the house, such as relatives or borders? TransUnion can find out by determining who's getting mail at this address. Other indicators include auto leasing and credit reports.

"A larger number of residents creates more risk," said McElroy.

But TransUnion goes beyond this by checking criminal and court records, along with motor vehicle violations. It examines moving and nonmoving citations, drug and alcohol violations, and failure to show up for a court date.

In other words: Don't do the crime if you don't want to pay more for insurance.

The TransUnion model also correlates driving records with home insurance. This can be particularly helpful for big insurers like Allstate (ALL) and State Farm, which provide both home and auto insurance, as well as many other types.

"Only a handful of underwriters use driving records as part of their criteria for homeowners underwriting," said McElroy. "One way to make underwriting more accurate is to use all this information."

But should knowing everything about everyone who lives in your home correlate to what you pay for insurance? TransUnion thinks so. Its study shows a definite link between residents who have been in trouble with the law and "nonweather" losses such as kitchen fires and bodily injuries such as "slip and falls." In some cases, the risk doubles.

Consumer and privacy advocates are appalled at this look into your living room. "The data will be very dicey and questionable," said Robert Hunter, director of insurance for the Consumer Federation of America. "There are lots of errors in motor vehicle records, and the data was not collected for this sort of use."

Most important, said Hunter, is that consumers -- the people buying home insurance -- have no way to know what's in their record or a way to fix it if it's wrong.

McElroy said TransUnion itself has a "dispute process" for anyone who feels his credit report is in error.

But since TransUnion is providing this confidential data to an insurer, which then uses it to decide whether to grant or deny home coverage, and at what price, the homeowner may never find out what impact that data had on their denial or cost of coverage.

McElroy said it's the insurer's responsibility to ask the applicant or homeowner, "Isn't there someone else living in the house?" to find out if the information is accurate. If a premium is increased, a notice of the reason should be given at the time of renewal.

A homeowner can dispute the reason. And there's always another option: "You can go shopping for another insurer," he said. But other insurers may already be using the same information to set their rates.

Hunter said TransUnion's data also discriminates against low-income urban residents and minorities, people who are more likely to have extended families in their homes, have minor scrapes with the law and be unable to afford an attorney who could keep them out of court.

"Some jurisdictions like Washington, D.C, go overboard with cameras and fines as a money-raiser," he noted.

McElroy responded that TransUnion has a ranking of "loss severity points" in its scale. "Speeding (less than 10 miles over the limit) would be low severity," he said, "while driving while intoxicated would be higher." That scale, of course, is proprietary, so a homeowner might never know how much it counted against her.

So, do TransUnion's analytics discriminate against lower-income applicants? State commissioners who regulate insurance are likely to scrutinize this and similar strategies. California and other states already limit the use of credit scores in determining how much drivers pay for car insurance.

But insurers say the practice cuts both ways. They want to insure the large "underserved" population of immigrants who want to buy homes, but they don't want to lose money on those likely to burn them down to collect. TransUnion's analytics may help them solve that problem.